MCA has notified the National Financial Reporting Authority (NFRA) Rules, 2018, which inter-alia includes provisions relating to Classes of companies to be governed by NFRA along with its Functions and duties,
ICAI to Recommend and NFRA to monitor and enforce compliance of accounting/ auditing standards. Besides, NFRA has been empowered to issue directions to any auditor for taking appropriate measures to improve audit quality, etc.
G.S.R. (E)… – In exercise of the powers conferred under sub-sections (2) and (4) of section 132, sub-section (1) of section 139 and sub-section (1) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules, namely,-
1. Short Title and Commencement.-
(1) These rules may be called the National Financial Reporting Authority Rules, 2018.
(2) They shall come into force on the date of their publication in the Official Gazette.
(1) In these rules, unless the context otherwise requires,-
(a) “accounting standards” means the ‘accounting standards’ as defined in clause (2) of section 2 of the Act;
(b) “Act” means the Companies Act, 2013 (18 of 2013);
(c) “auditing standards” means the “auditing standards’ as defined in clause (7) of section 2 of the Act;
(d) “auditor” means an individual or a firm including a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009) or any other Act for the time being in force, who has been appointed as an auditor of a company or a body corporate under section 139 of the Act or under any other Act for the time being in force;
(e) “Authority” means the National Financial Reporting Authority constituted under sub-section (1) of section 132 of the Act;
(f) “chairperson” means the chairperson of the Authority;
(9) “Division” means a division established by the Authority for the purpose of organising and carrying out its functions and duties;
(h) “Form” means the Form annexed to these Rules;
(i) “full-time member” means a member who has been appointed as such under sub-section (3) of section 132 of the Act;
(j) “part-time member” means a member of the Authority other than a full-time member.
(2) Words and expressions used and not defined in these rules but defined in the Act shall have the same meanings respectively assigned to them in the Act.
3. Classes of companies and bodies corporate governed by the Authority.-
(1) The Authority shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under sub-section (2) of section 132 or undertake investigation under sub-section (4) of such section of the auditors of the following class of companies and bodies corporate, namely:-
(a) companies whose securities are listed on any stock exchange in India or outside lndia;
(b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act;
(d) any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or net worth of such subsidiary or associate company exceeds twenty per cent. of the consolidated income or consolidated net worth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d).
(2) Every existing body corporate other than a company governed by these rules, shall inform the Authority within thirty days of the commencement of these rules, in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules.
(3) Every body corporate, other than a company as defined in clause (20) of section 2, formed in India and governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1) of section 139, inform the Authority in Form NFRA-1, the particulars of the auditor appointed by such body corporate:
Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment of its auditor in Form NFRA-1 shall continue to be governed by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or aggregate of loans, debentures and deposits falls below the limit stated therein.
4. Functions and duties of the Authority.-
(1) The Authority shall protect the public interest and the interests of investors, creditors and others associated with the companies or bodies corporate governed under rule 3 by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by auditors.
(2) In particular, and without prejudice to the generality of the foregoing, the Authority shall:-
(a) maintain details of particulars of auditors appointed in the companies and bodies corporate specified in rule 3;
(b) recommend accounting standards and auditing standards for approval by the Central Government;
(c) monitor and enforce compliance with accounting standards and auditing standards;
(d) oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
(e) promote awareness in relation to the compliance of accounting standards and auditing standards;
(f) co-operate with national and international organisations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards; and
(g) perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
(3) The Central Government may, by notification, and subject to such conditions, limitations and restrictions as may be specified therein delegate any of its powers or functions under the Act, other than the power to make rules, to the Authority.
5. Annual return. Every auditor referred to in rule 3 shall file a return with the Authority on or before 3oth April every year in such form as may be specified by the Central Government.
6. Recommending accounting standards and auditing standards.-
(1) For the purpose of recommending accounting standards or auditing standards for approval by the Central Government, the Authority-
(a) shall receive recommendations from the Institute of Chartered Accountants of India on proposals for new accounting standards or auditing standards or for amendments to existing accounting standards or auditing standards;
(b) may seek additional information from the Institute of Chartered Accountants of India on the recommendations received under clause (a), if required.
(2) The Authority shall consider the recommendations and additional information in such manner as it deems fit before making recommendations to the Central Government.
7. Monitoring and enforcing compliance with accounting standards.-
(1) For the purpose of monitoring and enforcing compliance with accounting standards under the Act by a company or a body corporate governed under rule 3, the Authority may review the financial statements of such company or body corporate, as the case may be, and if so required, direct such company or body corporate or its auditor by a written notice, to provide further information or explanation or any relevant documents relating to such company or body corporate, within such reasonable time as may be specified in the notice.
(2) The Authority may require the personal presence of the officers of the company or body corporate and its auditor for seeking additional information or explanation in connection with the review of the financial statements of such company or body corporate.
(3) The Authority shall publish its findings relating to non-complainces on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.
(4) Where the Authority finds or has reason to believe that any accounting standard has or may have been violated, it may decide on the further course of investigation or enforcement action through its concerned Division.
8. Monitoring and enforcing compliance with auditing standards.-
(1) For the A purpose of monitoring and enforcing compliance with auditing standards under the Act by a company or a body corporate governed under rule 3, the Authority may:
(a) review working papers (including audit plan and other audit documents) and communications related to the audit;
(b) evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor; and
(c) perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be considered necessary or appropriate.
(2) The Authority may require an auditor to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor and may take such action on the report as may be necessary.
(3) The Authority may seek additional information or may require the personal presence of the auditor for seeking additional information or explanation in connection with the conduct of an audit.
(4) The Authority shall perform its monitoring and enforcement activities through its officers or experts with sufficient experience in audit of the relevant industry.
(5) The Authority shall publish its findings relating to non-complainces on its website and in such other manner as it considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.
(6) The Authority shall not publish proprietary or confidential information, unless it has reasons to do so in the public interest and it records the reasons in writing.
(7) The Authority may send a separate report containing proprietary or confidential information to the Central Government for its information.
(8) Where the Authority finds or has reason to believe that any law or professional or other standard has or may have been violated by an auditor, it may decide on the further course of investigation or enforcement action through its concerned Division.
9. Overseeing the quality of service and suggesting measures for improvement.-
(1) On the basis of its review, the Authority may direct an auditor to take measures for improvement of audit quality including changes in their audit processes, quality control, and audit reports and specify a detailed plan with time-limits.
(2) It shall be the duty of the auditor to make the required improvements and send a report to the Authority explaining how it has complied with the directions made by the Authority.
(3) The Authority shall monitor the improvements made by the auditor and take such action as it deems fit depending on the progress made by the auditor.
(4) The Authority may refer cases with regard to overseeing the quality of service of auditors of companies or bodies corporate referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or companies or bodies corporate from such Board as it may deem appropriate.
(5) The Authority may take the assistance of experts for its oversight and monitoring activities. (contd… please refer above attachment).